OPINION – Reviewing the Future Development of Hong Kong’s ESG Guide

Sustainability reporting is an organization’s practice of reporting publicly on its economic, environmental, social, and governance results.


Teresa Chu 

President of the General Assembly 

Macau Institute for Corporate Social Responsibility in Greater China (MICSRGC) 


Around the world, there has been a surge of reporting guidelines or standards that aim to motivate companies to improve their environmental, social and governance (ESG hereafter) performance as well as to improve transparency of the company. An example of such guidelines is the recommendations of the Task Force on Climate-related Financial Disclosures, which was set up by the G20 Financial Stability Board in 2015. The recommendations developed by the Task Force are promoted by institutional investors for consistent disclosures on how a company copes with climate risks and approaches climate-related opportunities worldwide. As investors are increasingly concerned about the impact of ESG factors on firms’ business risks, financial performance and future prospects, they are urging companies to increase both the transparency of financial reporting as well as corporate social responsibility activities. Considering mere financial statements are becoming less useful to investors and stakeholders nowadays, the traditional accounting information system no longer satisfies their needs. It is expected that firms will or should provide more non-financial quality disclosures that could facilitate value creation in the market.  

According to Appendix 27 of the listing rules in Hong Kong, the ESG Guide was upgraded in 2016 to ‘comply or explain’ provisions, in which all listed companies have to meet this disclosure obligation. Besides reporting on the ‘comply or explain’ matters set out in the Guide, the Hong Kong Exchanges and Clearing Limited (the HKEx) encourages an issuer to identify and disclose additional ESG issues and Key Performance Indicators (KPIs), including recommended disclosures, that reflect significant environmental and social impacts made by the issuer. It is believed to be a key part of the governance process achieved by promoting broader transparency in the equity market. Prompted by this change in the ESG Guide, I became keen to investigate whether the ‘comply or explain’ provision is effective in enhancing sustainability reporting for firms listed in Hong Kong.  

To compare company disclosure of ESG information before and after the implementation of the new provision, I drew from the listed companies from within the consumer services industry (as categorized by the Hang Seng Industry Classification System) and reviewed their published annual and CSR reports from 2015 (before the change) to 2017 (2 years after the change). An ESG scoring system consisting of four perspectives (namely “Responsible unit or personnel in managing ESG risks”, “Landscaping of the ESG information disclosures”, “Quality of compliance” and “Quality in negative events disclosure”) was established as a proxy measure for both the quality of the disclosures as well as the level of compliance with the new rules. By utilizing different statistical analyses, I found that the quality of the ESG disclosure by companies in the consumer services industry improved in both 2016 and 2017 with most of the improvements observed in the period from 2015 to 2016. In addition, there is evidence that better quality ESG disclosure is positively associated with firm financial performance (that is, return on assets and return on equity). Although this study only samples one industry, it sheds some light on the new “comply or explain” rule in the Hong Kong ESG Guide as being effective in promoting sustainability reporting and creates value to those companies that have a higher quality of ESG disclosure. 

Recently the HKEx made further upgrades to some of the ESG codes to “mandatory disclosures”, and the ESG Guide of Hong Kong still needs to go through more transformations before it can be considered fully developed. Meanwhile I suggest that companies enhance areas that are not mandatory yet may further improve their quality of CSR disclosure. These areas may include a materiality analysis to highlight certain ESG perspectives that are particularly critical to specific industries or companies; a separate ESG report with detailed mapping about how the guidelines are being met can enhance readability; and last but not the least, more details to be disclosed about negative events faced by the company rather than just green washing those incidents. Having said that, the ESG Guide of Hong Kong can indeed serve as a good role model in the Greater Bay Area. The Government of the Macau Special Administrative Region intends to establish a stock market in the near future and Macau will certainly need to establish some standards and guidelines for CSR disclosures in the upcoming capital market.